A couple of summer articles from The Wall Street Journal that – given the latest unemployment figures – are more true than ever:
AUGUST 30, 2010
The Folly of Subsidizing Unemployment
My calculations suggest the jobless rate could be as low as 6.8%, instead of 9.5%, if jobless benefits hadn’t been extended to 99 weeks.
By ROBERT BARRO
Congressman John Boehner recently suggested that President Obama replace his top economic advisers. I think he may have a point. The economic “recovery” has been disappointing, to put it mildly, and it has become increasingly clear that the blame lies with the policies of the Obama administration, not with those of its predecessor.
In general, the current administration has been too focused on expanding government, redistributing more from rich to poor, and stimulating aggregate demand. I have previously criticized the stimulus package as cost-ineffective. In particular, whatever tax reductions were in the package did not involve the cuts in marginal income tax rates that encourage investment, work effort and productivity growth.
Now the administration wants to kill the 2003 income-tax cuts, at least the parts that reduced marginal income tax rates for high-income earners and for all recipients of dividend income. This proposal is particularly disturbing because the 2003 law was George W. Bush’s main economic achievement; unlike most of Mr. Bush’s policies, this one was well-conceived and effective.
The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.
In a recession, it is more likely that individual unemployment reflects weak economic conditions, rather than individual decisions to choose leisure over work. Therefore, it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person’s state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries.
The administration has argued that the more generous unemployment-insurance program could not have had much impact on the unemployment rate because the recession is so severe that jobs are unavailable for many people. This perspective is odd on its face because, even at the worst of the downturn, the U.S. labor market featured a tremendous amount of turnover in the form of large numbers of persons hired and separated every month.
For example, the Bureau of Labor Statistics reports that, near the worst of the recession in March 2009, 3.9 million people were hired and 4.7 million were separated from jobs. This net loss of 800,000 jobs in one month indicates a very weak economy—but nevertheless one in which 3.9 million people were hired. A program that reduced incentives for people to search for and accept jobs could surely matter a lot here.
Moreover, although the peak unemployment rate (thus far) of 10.1% in October 2009 is very disturbing, the rate was even higher in the 1982 recession (10.8% in November-December 1982). Thus, there is no reason to think that the United States is in a new world in which incentives provided by more generous unemployment-insurance programs do not matter much for unemployment.
Another reason to be skeptical about the administration’s stance is that generous unemployment-insurance programs have been found to raise unemployment in many Western European countries in which unemployment rates have been far higher than the current U.S. rate. In Europe, the influence has worked particularly through increases in long-term unemployment. So the key question is what happened to long-term unemployment in the United States during the current recession?
To begin with a historical perspective, in the 1982 recession the peak unemployment rate of 10.8% in November-December 1982 corresponded to a mean duration of unemployment of 17.6 weeks and a share of long-term unemployment (those unemployed more than 26 weeks) of 20.4%. Long-term unemployment peaked later, in July 1983, when the unemployment rate had fallen to 9.4%. At that point, the mean duration of unemployment reached 21.2 weeks and the share of long-term unemployment was 24.5%. These numbers are the highest observed in the post-World War II period until recently. Thus, we can think of previous recessions (including those in 2001, 1990-91 and before 1982) as featuring a mean duration of unemployment of less than 21 weeks and a share of long-term unemployment of less than 25%.
These numbers provide a stark contrast with joblessness today. The peak unemployment rate of 10.1% in October 2009 corresponded to a mean duration of unemployment of 27.2 weeks and a share of long-term unemployment of 36%. The duration of unemployment peaked (thus far) at 35.2 weeks in June 2010, when the share of long-term unemployment in the total reached a remarkable 46.2%. These numbers are way above the ceilings of 21 weeks and 25% share applicable to previous post-World War II recessions. The dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost surely the culprit.
To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and—I assume—the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.
Consider how the prospects for Democrats in the November elections would look if the unemployment rate were now only 6.8%. Obviously, this change would make all the difference, and President Obama can reasonably blame his economic advisers. They should have protected their boss by standing firm and arguing that a reckless expansion of unemployment-insurance coverage to 99 weeks was unwise economically and politically. Congressman Boehner’s advice to Mr. Obama seems correct, though possibly too late to matter.
Mr. Barro is an economics professor at Harvard University and a senior fellow at Stanford University’s Hoover Institution.
A particularly interesting point comes from this statement:
The administration has argued that the more generous unemployment-insurance program could not have had much impact on the unemployment rate because the recession is so severe that jobs are unavailable for many people
The Obama administration manifests pathological dishonesty and hypocrisy: on the one hand, they tout their stimulus as being incredibly effective, and tout themselves as guiding the economy back into recovery. And yet in demanding an additional 13-month extension to the already 2 full years of unemployment benefits, the Obama administration clearly doesn’t believe its own load of crap.
If the stimulus was anything but a failure, and if we are on the “road to recovery,” as they keep saying, we don’t need this giant leap toward permanent unemployment benefits.
Here’s another one from The Wall Street Journal:
JULY 20, 2010
If you can’t create any jobs, pay people not to work.
Presidents typically invite Americans to appear at Rose Garden press conferences to trumpet their policy successes, but yesterday we saw what may have been a first. President Obama introduced three Americans—an auto worker, a fitness center employee and a woman in real estate—who’ve been out of work so long they underscore the failure of his economic program. Where are his spinmeisters when he really needs them?
Sure, Mr. Obama’s ostensible purpose was to lobby Congress for the eighth extension of jobless benefits since the recession began, to a record 99 weeks, or nearly two years. And he whacked Senate Republicans for blocking the extension, though Republicans are merely asking that the extension be offset by cuts in other federal spending.
But Mr. Obama was nonetheless obliged to concede that, 18 months after his $862 billion stimulus, there are still five job seekers for every job opening and that 2.5 million Americans will soon run out of unemployment benefits. What happens when the 99 weeks of benefits run out? Will the President demand that they be extended to three years, or four?
Only last week Vice President Joe Biden was hailing the stimulus for “saving or creating” three million jobs. This week the White House says we need even more stimulus, in the form of jobless checks, to make up for the jobs his original spending stimulus didn’t create.
The one possibility the President and Congressional Democrats won’t entertain is that their own spending and taxing and regulating and labor union favoritism have become the main hindrance to job creation. Since February 2009, the jobless rate has climbed to 9.5% from 8.1%, and private industry has shed two million jobs. The overall economy has been expanding for at least a year, but employers still don’t seem confident enough to add new workers. The economists who sold us the stimulus say it’s a mystery. But maybe employers are afraid to hire because they don’t know what costs government will impose on them next.
In the immediate policy case, Democrats are going so far as to subsidize more unemployment. If you subsidize something, you get more of it. So if you pay people not to work, they often decide . . . not to work. Or at least to delay looking or decline a less than perfect job offer, holding out for something else that may or may not materialize.
The economic consensus—which includes Obama Administration economists in their previous lives—couldn’t be clearer on this. In a 1990 study for the National Bureau of Economic Research, labor economist Lawrence Katz found that “The results indicate that a one week increase in potential benefit duration increases the average duration of the unemployment spells of UI recipients by 0.16 to 0.20 weeks.”
A March 2010 economic report by Michael Feroli of J.P. Morgan Chase examined several studies and concluded that “lengthened availability of jobless benefits has raised the unemployment rate by 1.5% points.”
A 2006 NBER study by Raj Chetty of UC Berkeley on a related subject begins, “It is well known that unemployment benefits raise unemployment durations.”
The current recession is bearing this out, as a record 6.7 million Americans have now been out of work for at least six months. That’s 45.5% of the total jobless, close to the highest share ever recorded. The number was 23.4% in February 2009. Americans tend to support jobless benefits on compassion grounds, but at some point such a policy becomes the false compassion of welfare by keeping people out of the job market and thus not learning new skills.
Mr. Obama also claimed yesterday that he wants to cut taxes on small businesses. That’s a good idea, but Mr. Obama’s proposal to provide one-year temporary tax cuts, such as expensing of certain capital purchases, will be dwarfed by one of the largest tax increases on small- and medium-sized firms in history that is scheduled to hit on January 1. The increase in the capital gains tax will fall hardest on start ups and expanding businesses that need capital for growth. More than half of the “rich” who will pay higher income tax rates next year are small business owners and investors.
The President is right that “we’ve got a lot of work to do” to get Americans back to work and that the toll on families from high unemployment is considerable. There are few things in life more demoralizing than being unemployed for a lengthy period of time. But paying people not to work and adding $30 billion more to nearly $1.4 trillion of deficit spending is a dismal substitute for real economic growth and private job
The way the Democrats describe it, we would literally be much better off as a country if every single American were to quit working and go on unemployment. Because then we’d get these wonderful benefits that make the whole system work.
“Now I think we should use a measure for everything that we do—what does it do to create jobs, what does it do to reduce the deficit? Unemployment insurance, economists tell us, returns $2 for every $1 that is put out there for unemployment insurance. People need the money. They spend it immediately for necessity. It injects demand into the economy. It creates jobs to help reduce the deficit.
So what Obama should do is fire EVERYBODY. And then we can literally DOUBLE our GDP overnight!!!
Unemployment is clearly better than employment. Which is why the Democrats want to subsidize unemployment to the fullest extent possible.
As incredible as it sounds, that’s actually the way it works in the bubble world of the Democrat Party.
As for me, I’m holding out for a CEO position at a Fortune 500. And I’ll keep milking my bennies until I get that dream job. Because Obama says I can.
Meanwhile, Democrats are absolutely dead-set against allowing people to keep the money they earn. Because they worship the government as God, and believe their Marxist and Stalinist ideology that the state owns the people and everything they earn. And out of that depraved and literally demonic mindset, they reason that allowing the rich to keep more of the money they earn is actually robbing the government. Because you don’t work for yourself and for your family; you work exclusively for your god, the government, as epitomized in Barack Obama.
Brit Hume nailed this, arguing:
“But the very language used in discussing these issues tells you something as well. In Washington, letting people keep more of their own money is considered a cost. As if all the money really belongs to the government in the first place in which what you get to keep is an expenditure.”
So what’s the path to prosperity?
Is it paying people not to work, and saying if you work, we’re going to take your money and give it to people who won’t get jobs for 2 years, 3 years, forever; or is it allowing people to keep more of what they earn, and encouraging them to work, and to reward them for working harder?
That’s the difference between the Democrat and the Republican parties.